debt dynamite dominoes: the coming financial catastrophe

8/9/2019 Debt Dynamite Dominoes: The Coming Financial Catastrophe

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Debt Dynamite Domino es: The Coming F inancial CatastropheAssessing the I llusion of Recovery

By Andrew Gavin Marshall

Global Research , February 22, 2010

Understanding the Nature of the Global Economic Crisis The people have been lulled into a false sense of safety under the ruse of a perceived economic recovery. Unfortunately, what the majority of people think does not make it so, especially when the people making thekey decisions think and act to the contrary. The sovereign debt crises that have been unfolding in the pastcouple years and more recently in Greece, are canaries in the coal mine for the rest of Western civilization. The crisis threatens to spread to Spain, Portugal and Ireland; like dominoes, one country after another willcollapse into a debt and currency crisis, all the way to America. In October 2008, the mainstream media and politicians of the Western world were warning of an impendingdepression if actions were not taken to quickly prevent this. The problem was that this crisis had been along-time coming, and whats worse, is that the actions governments took did not address any of the core,systemic issues and problems with the global economy; they merely set out to save the banking industry fromcollapse. To do this, governments around the world implemented massive stimulus and bailout packages,plunging their countries deeper into debt to save the banks from themselves, while charging it to people of theworld. Then an uproar of stock market speculation followed, as money was pumped into the stocks, but not the realeconomy. This recovery has been nothing but a complete and utter illusion, and within the next two years, theillusion will likely come to a complete collapse. The governments gave the banks a blank check, charged it to the public, and now its time to pay; throughdrastic tax increases, social spending cuts, privatization of state industries and services, dismantling of anyprotective tariffs and trade regulations, and raising interest rates. The effect that this will have is to rapidlyaccelerate, both in the speed and volume, the unemployment rate, globally. The stock market would crash torecord lows, where governments would be forced to freeze them altogether. When the crisis is over, the middle classes of the western world will have been liquidated of their economic,political and social status. The global economy will have gone through the greatest consolidation of industry andbanking in world history leading to a system in which only a few corporations and banks control the globaleconomy and its resources; governments will have lost that right. The people of the western world will betreated by the financial oligarchs as they have treated the global South and in particular, Africa; they willremove our social structures and foundations so that we become entirely subservient to their dominance overthe economic and political structures of our society. This is where we stand today, and is the road on which we travel. The western world has been plundered into poverty, a process long underway, but with the unfolding of thecrisis, will be rapidly accelerated. As our societies collapse in on themselves, the governments will protect thebanks and multinationals. When the people go out into the streets, as they invariably do and will, thegovernment will not come to their aid, but will come with police and military forces to crush the protests andoppress the people. The social foundations will collapse with the economy, and the state will clamp down toprevent the people from constructing a new one. The road to recovery is far from here. When the crisis has come to an end, the world we know will havechanged dramatically. No one ever grows up in the world they were born into; everything is always changing.Now is no exception. The only difference is, that we are about to go through the most rapid changes the worldhas seen thus far. Assessing the I llusion of Recovery In August of 2009, I wrote an article, Entering the Greatest Depression in History , in which I analyzed how thereis a deep systemic crisis in the Capitalist system in which we have gone through merely one burst bubble thusfar, the housing bubble, but there remains a great many others. There remains as a significantly larger threat than the housing collapse, a commercial real estate bubble. As the

Deutsche Bank CEO said in May of 2009, It's either the beginning of the end or the end of the beginning. Of even greater significance is what has been termed the bailout bubble in which governments havesuperficially inflated the economies through massive debt-inducing bailout packages. As of July of 2009, thegovernment watchdog and investigator of the US bailout program stated that the U.S. may have put itself atrisk of up to $23.7 trillion dollars.


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[See: Andrew Gavin Marshall, Entering the Greatest Depression in History. Global Research: August 7, 2009 ] In October of 2009, approximately one year following the great panic of 2008, I wrote an article titled, TheEconomic Recovery is an Illusion , in which I analyzed what the most prestigious and powerful financial institutionin the world, the Bank for International Settlements (BIS), had to say about the crisis and recovery. The BIS, as well as its former chief economist, who had both correctly predicted the crisis that unfolded in 2008,were warning of a future crisis in the global economy, citing the fact that none of the key issues and structuralproblems with the economy had been changed, and that government bailouts may do more harm than good inthe long run. William White, former Chief Economist of the BIS, warned:

The world has not tackled the problems at the heart of the economic downturn and is likely toslip back into recession. [He] warned that government actions to help the economy in the shortrun may be sowing the seeds for future crises.

[See: Andrew Gavin Marshall, The Economic Recovery is an Illusion. Global Research: October 3, 2009 ] Crying Wolf or Castigating Cassandra? While people were being lulled into a false sense of security, prominent voices warning of the harsh bite of reality to come were, instead of being listened to, berated and pushed aside by the mainstream media. Gerald

Celente, who accurately predicted the economic crisis of 2008 and who had been warning of a much larger crisisto come, had been accused by the mainstream media of pushing pessimism porn.[1] Celentes response hasbeen that he isnt pushing pessimism porn, but that he refuses to push optimism opium of which themainstream media does so outstandingly. So, are these voices of criticism merely crying wolf or is it that the media is out to castigate Cassandra?Cassandra, in Greek mythology, was the daughter of King Priam and Queen Hecuba of Troy, who was grantedby the God Apollo the gift of prophecy. She prophesied and warned the Trojans of the Trojan Horse, the death of Agamemnon and the destruction of Troy. When she warned the Trojans, they simply cast her aside as mad and did not heed her warnings. While those who warn of a future economic crisis may not have been granted the gift of prophecy from Apollo,they certainly have the ability of comprehension.

So what do the Cassandras of the world have to say today? Should we listen? Empire and Economics To understand the global economic crisis, we must understand the global causes of the economic crisis. We mustfirst determine how we got to the initial crisis, from there, we can critically assess how governments respondedto the outbreak of the crisis, and thus, we can determine where we currently stand, and where we are likelyheaded. Africa and much of the developing world was released from the socio-political-economic restraints of theEuropean empires throughout the 1950s and into the 60s. Africans began to try to take their nations into theirown hands. At the end of World War II, the United States was the greatest power in the world. It had commandof the United Nations, the World Bank and the IMF, as well as setting up the NATO military alliance. The USdollar reigned supreme, and its value was tied to gold.

In 1954, Western European elites worked together to form an international think tank called the BilderbergGroup, which would seek to link the political economies of Western Europe and North America. Every year,roughly 130 of the most powerful people in academia, media, military, industry, banking, and politics wouldmeet to debate and discuss key issues related to the expansion of Western hegemony over the world and there-shaping of world order. They undertook, as one of their key agendas, the formation of the European Unionand the Euro currency unit. [See: Andrew Gavin Marshall, Controlling the Global Economy: Bilderberg, the Trilateral Commission and theFederal Reserve. Global Research: August 3, 2009 ] In 1971, Nixon abandoned the dollars link to gold, which meant that the dollar no longer had a fixed exchangerate, but would change according to the whims and choices of the Federal Reserve (the central bank of theUnited States). One key individual that was responsible for this choice was the third highest official in the U.S.Treasury Department at the time, Paul Volcker.[2] Volcker got his start as a staff economist at the New York Federal Reserve Bank in the early 50s. After fiveyears there, David Rockefellers Chase Bank lured him away.[3] So in 1957, Volcker went to work at Chase,where Rockefeller recruited him as his special assistant on a congressional commission on money and credit inAmerica and for help, later, on an advisory commission to the Treasury Department.[4] In the early 60s,


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Volcker went to work in the Treasury Department, and returned to Chase in 1965 as an aide to Rockefeller, thistime as vice president dealing with international business. With Nixon entering the White House, Volcker gotthe third highest job in the Treasury Department. This put him at the center of the decision making processbehind the dissolution of the Bretton Woods agreement by abandoning the dollars link to gold in 1971.[5] In 1973, David Rockefeller, the then-Chairman of Chase Manhattan Bank and President of the Council onForeign Relations, created the Trilateral Commission, which sought to expand upon the Bilderberg Group. It wasan international think tank, which would include elites from Western Europe, North America, and Japan, and wasto align a trilateral political economic partnership between these regions. It was to further the interests andhegemony of the Western controlled world order. That same year, the Petri-dish experiment of neoliberalism was undertaken in Chile. While a leftist governmentwas coming to power in Chile, threatening the economic interests of not only David Rockefellers bank, but anumber of American corporations, David Rockefeller set up meetings between Henry Kissinger, Nixons NationalSecurity Adviser, and a number of leading corporate industrialists. Kissinger in turn, set up meetings betweenthese individuals and the CIA chief and Nixon himself. Within a short while, the CIA had begun an operation totopple the government of Chile. On September 11, 1973, a Chilean General, with the help of the CIA, overthrew the government of Chile andinstalled a military dictatorship that killed thousands. The day following the coup, a plan for an economicrestructuring of Chile was on the presidents desk. The economic advisers from the University of Chicago, wherethe ideas of Milton Freidman poured out, designed the restructuring of Chile along neoliberal lines. Neoliberalism was thus born in violence.

In 1973, a global oil crisis hit the world. This was the result of the Yom Kippur War, which took place in theMiddle East in 1973. However, much more covertly, it was an American strategem. Right when the US droppedthe dollars peg to gold, the State Department had quietly begun pressuring Saudi Arabia and other OPECnations to increase the price of oil. At the 1973 Bilderberg meeting, held six months before the oil price rises, a400% increase in the price of oil was discussed. The discussion was over what to do with the large influx of whatwould come to be called petrodollars, the oil revenues of the OPEC nations. Henry Kissinger worked behind the scenes in 1973 to ensure a war would take place in the Middle East, whichhappened in October. Then, the OPEC nations drastically increased the price of oil. Many newly industrializingnations of the developing world, free from the shackles of overt political and economic imperialism, suddenlyfaced a problem: oil is the lifeblood of an industrial society and it is imperative in the process of developmentand industrialization. If they were to continue to develop and industrialize, they would need the money to affordto do so.

Concurrently, the oil producing nations of the world were awash with petrodollars, bringing in record surpluses.However, to make a profit, the money would need to be invested. This is where the Western banking systemcame to the scene. With the loss of the dollars link to cold, the US currency could flow around the world at amuch faster rate. The price of oil was tied to the price of the US dollar, and so oil was traded in US dollars. OPECnations thus invested their oil money into Western banks, which in turn, would recycle that money by loaningit to the developing nations of the world in need of financing industrialization. It seemed like a win-win situation:the oil nations make money, invest it in the West, which loans it to the South, to be able to develop and build

western societies. However, all things do not end as fairy tales, especially when those in power are threatened. An industrializedand developed Global South (Latin America, Africa, and parts of Asia) would not be a good thing for theestablished Western elites. If they wanted to maintain their hegemony over the world, they must prevent therise of potential rivals, especially in regions so rich in natural resources and the global supplies of energy.

It was at this time that the United States initiated talks with China. The opening of China was to be a Westernproject of expanding Western capital into China. China will be allowed to rise only so much as the West allows it.The Chinese elite were happy to oblige with the prospect of their own growth in political and economic power.India and Brazil also followed suit, but to a smaller degree than that of China. China and India were to broughtwithin the framework of the Trilateral partnership, and in time, both China and India would have officialsattending meetings of the Trilateral Commission. So money flowed around the world, primarily in the form of the US dollar. Foreign central banks would buy USTreasuries (debts) as an investment, which would also show faith in the strength of the US dollar and economy.The hegemony of the US dollar reached around the world. [See: Andrew Gavin Marshall, Controlling the Global Economy: Bilderberg, the Trilateral Commission and theFederal Reserve. Global Research: August 3, 2009 ] The Hegemony of Neoliberalism In 1977, however, a new US administration came to power under the Presidency of Jimmy Carter, who washimself a member of the Trilateral Commission. With his administration, came another roughly two-dozenmembers of the Trilateral Commission to fill key positions within his government. In 1973, Paul Volcker, the


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rising star through Chase Manhattan and the Treasury Department became a member of the TrilateralCommission. In 1975, he was made President of the Federal Reserve Bank of New York, the most powerful of the 12 regional Fed banks. In 1979, Jimmy Carter gave the job of Treasury Secretary to the former Governor of the Federal Reserve System, and in turn, David Rockefeller recommended Jimmy Carter appoint Paul Volckeras Governor of the Federal Reserve Board, which Carter quickly did.[6] In 1979, the price of oil skyrocketed again. This time, Paul Volcker at the Fed was to take a different approach.His response was to drastically increase interest rates. Interest rates went from 2% in the late 70s to 18% inthe early 1980s. The effect this had was that the US economy went into recession, and greatly reduced itsimports from developing nations. A the same time, developing nations, who had taken on heavy debt burdensto finance industrialization, suddenly found themselves having to pay 18% interest payments on their loans. Theidea that they could borrow heavily to build an industrial society, which would in turn pay off their loans, hadsuddenly come to a halt. As the US dollar had spread around the world in the forms of petrodollars and loans,the decisions that the Fed made would affect the entire world. In 1982, Mexico announced that it could no longerservice its debt, and defaulted on its loans. This marked the spread of the 1980s debt crisis, which spreadthroughout Latin America and across the continent of Africa. Suddenly, much of the developing world was plunged into crisis. Thus, the IMF and World Bank entered thescene with their newly developed Structural Adjustment Programs (SAPs), which would encompass a countryin need signing an agreement, the SAP, which would provide the country with a loan from the IMF, as well as

development projects by the World Bank. In turn, the country would have to undergo a neoliberalrestructuring of its country. Neoliberalism spread out of America and Britain in the 1980s; through their financial empires and instruments

including the World Bank and IMF they spread the neoliberal ideology around the globe. Countries thatresisted neoliberalism were subjected to regime change. This would occur through financial manipulation, viacurrency speculation or the hegemonic monetary policies of the Western nations, primarily the United States;economic sanctions, via the United Nations or simply done on a bilateral basis; covert regime change, through

colour revolutions or coups, assassinations; and sometimes overt military campaigns and war. The neoliberal ideology consisted in what has often been termed free market fundamentalism. This wouldentail a massive wave of privatization, in which state assets and industries are privatized in order to becomeeconomically more productive and efficient. This would have the social effect of leading to the firing of entireareas of the public sector, especially health and education as well as any specially protected national industries,which for many poor nations meant vital natural resources. Then, the market would be liberalized which meant that restrictions and impediments to foreign investmentsin the nation would diminish by reducing or eliminating trade barriers and tariffs (taxes), and thus foreign capital

(Western corporations and banks) would be able to invest in the country easily, while national industries thatgrow and compete would be able to more easily invest in other nations and industries around the world. TheCentral Bank of the nation would then keep interest rates artificially low, to allow for the easier movement of money in and out of the country. The effect of this would be that foreign multinational corporations andinternational banks would be able to easily buy up the privatized industries, and thus, buy up the nationaleconomy. Simultaneously major national industries may be allowed to grow and work with the global banks andcorporations. This would essentially oligopolize the national economy, and bring it within the sphere of influenceof the global economy controlled by and for the Western elites. The European empires had imposed upon Africa and many other colonized peoples around the world a system of

indirect rule, in which local governance structures were restructured and reorganized into a system where thelocal population is governed by locals, but for the western colonial powers. Thus, a local elite is created, andthey enrich themselves through the colonial system, so they have no interest in challenging the colonial powers,but instead seek to protect their own interests, which happen to be the interests of the empire.

In the era of globalization, the leaders of the Third World have been co-opted and their societies reorganizedby and for the interests of the globalized elites. This is a system of indirect rule, and the local elites becoming

indirect globalists; they have been brought within the global system and structures of empire. Following a Structural Adjustment Program, masses of people would be left unemployed; the prices of essentialcommodities such as food and fuel would increase, sometimes by hundreds of percentiles, while the currencylost its value. Poverty would spread and entire sectors of the economy would be shut down. In the developing world of Asia, Latin America and Africa, these policies were especially damaging. With no social safety nets tofall into, the people would go hungry; the public state was dismantled. When it came to Africa, the continent so rapidly de-industrialized throughout the 1980s and into the 1990s thatpoverty increased by incredible degrees. With that, conflict would spread. In the 1990s, as the harsh effects of neoliberal policies were easily and quickly seen on the African continent, the main notion pushed throughacademia, the media, and policy circles was that the state of Africa was due to the mismanagement byAfricans. The blame was put solely on the national governments. While national political and economic elites didbecome complicit in the problems, the problems were imposed from beyond the continent, not from within. Thus, in the 1990s, the notion of good governance became prominent. This was the idea that in return forloans and help from the IMF and World Bank, nations would need to undertake reforms not only of the


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economic sector, but also to create the conditions of what the west perceived as good governance. However,in neoliberal parlance, good governance implies minimal governance, and governments still had to dismantletheir public sectors. They simply had to begin applying the illusion of democracy, through the holding of elections and allowing for the formation of a civil society. Freedom however, was still to maintain simply aneconomic concept, in that the nation would be free for Western capital to enter into. While massive poverty and violence spread across the continent, people were given the gift of elections. Theywould elect one leader, who would then be locked into an already pre-determined economic and politicalstructure. The political leaders would enrich themselves at the expense of others, and then be thrown out at thenext election, or simply fix the elections. This would continue, back and forth, all the while no real change wouldbe allowed to take place. Western imposed democracy had thus failed. An article in a 2002 edition of International Affairs , the journal of the Royal Institute of International Affairs (theBritish counter-part to the Council on Foreign Relations), wrote that:

In 1960 the average income of the top 20 per cent of the worlds population was 30 times that of the bottom 20 per cent. By 1990 it was 60 times, ad by 1997, 74 times that of the lowest fifth.Today the assets of the top three billionaires are more than the combined GNP [Gross NationalProduct] of all least developed countries and their 600 million people. This has been the context in which there has been an explosive growth in the presence of Western as well as local non-governmental organizations (NGOs) in Africa. NGOs today form aprominent part of the development machine, a vast institutional and disciplinary nexus of official agencies, practitioners, consultants, scholars and other miscellaneous experts producing

and consuming knowledge about the developing world. [. . . ] Aid (in which NGOs have come to play a significant role) is frequently portrayed as a formof altruism, a charitable act that enables wealth to flow from rich to poor, poverty to be reducedand the poor to be empowered.[7]

The authors then explained that NGOs have a peculiar evolution in Africa:

[T[heir role in development represents a continuity of the work of their precursors, themissionaries and voluntary organizations that cooperated in Europes colonization and control of Africa. Today their work contributes marginally to the relief of poverty, but significantly toundermining the struggle of African people to emancipate themselves from economic, social andpolitical oppression.[8]

The authors examined how with the spread of neoliberalism, the notion of a minimalist state spread across theworld and across Africa. Thus, they explain, the IMF and World Bank became the new commanders of post-colonial economies. However, these efforts were not imposed without resistance, as, Between 1976 and1992 there were 146 protests against IMF-supported austerity measures [SAPs] in 39 countries around theworld. Usually, however, governments responded with brute force, violently oppressing demonstrations.However, the widespread opposition to these reforms needed to be addressed by major organizations and

aid agencies in re-evaluating their approach to development:[9]

The outcome of these deliberations was the good governance agenda in the 1990s and thedecision to co-opt NGOs and other civil society organizations to a repackaged programme of welfare provision, a social initiative that could be more accurately described as a programme of social control.

The result was to implement the notion of pluralism in the form of multipartyism, which only ended up in

bringing into the public domain the seething divisions between sections of the ruling class competing for controlof the state. As for the welfare initiatives, the bilateral and multilateral aid agencies set aside significant fundsfor addressing the social dimensions of adjustment, which would minimize the more glaring inequalities thattheir policies perpetuated. This is where the growth of NGOs in Africa rapidly accelerated.[10] Africa had again, become firmly enraptured in the cold grip of imperialism. Conflicts in Africa would be stirred upby imperial foreign powers, often using ethnic divides to turn the people against each other, using the politicalleaders of African nations as vassals submissive to Western hegemony. War and conflict would spread, and withit, so too would Western capital and the multinational corporation. Building a New Economy While the developing world fell under the heavy sword of Western neoliberal hegemony, the Westernindustrialized societies experienced a rapid growth of their own economic strength. It was the Western banksand multinational corporations that spread into and took control of the economies of Africa, Latin America, Asia,and with the fall of the Soviet Union in 1991, Eastern Europe and Central Asia. Russia opened itself up to Western finance, and the IMF and World Bank swept in and imposed neoliberalrestructuring, which led to a collapse of the Russian economy, and enrichment of a few billionaire oligarchs whoown the Russian economy, and who are intricately connected with Western economic interests; again, indirect


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globalists. As the Western financial and commercial sectors took control of the vast majority of the worlds resources andproductive industries, amassing incredible profits, they needed new avenues in which to invest. Out of this needfor a new road to capital accumulation (making money), the US Federal Reserve stepped in to help out. The Federal Reserve in the 1990s began to ease interest rates lower and lower to again allow for the easierspread of money. This was the era of globalization, where proclamations of a New World Order emerged.Regional trading blocs and free trade agreements spread rapidly, as world systems of political and economicstructure increasingly grew out of the national structure and into a supra-national form. The North AmericanFree Trade Agreement (NAFTA) was implemented in an economic constitution for North America as Reaganreferred to it. Regionalism had emerged as the next major phase in the construction of the New World Order, with theEuropean Union being at the forefront. The world economy was globalized and so too, would the politicalstructure follow, on both regional and global levels. The World Trade Organization (WTO) was formed tomaintain and enshrine global neoliberal constitution for trade. All through this time, a truly global ruling classemerged, the Transnational Capitalist Class (TCC), or global elite, which constituted a singular internationalclass. However, as the wealth and power of elites grew, everyone else suffered. The middle class had been subjectedto a quiet dismantling. In the Western developed nations, industries and factories closed down, relocating tocheap Third World countries to exploit their labour, then sell the products in the Western world cheaply. Ourliving standards in the West began to fall, but because we could buy products for cheaper, no one seemed to

complain. We continued to consume, and we used credit and debt to do so. The middle class existed only intheory, but was in fact, beholden to the shackles of debt. The Clinton administration used globalization as its grand strategy throughout the 1990s, facilitating the declineof productive capital (as in, money that flows into production of goods and services), and implemented the risefinance capital (money made on money). Thus, financial speculation became one of the key tools of economicexpansion. This is what was termed the financialization of the economy. To allow this to occur, the Clintonadministration actively worked to deregulate the banking sector. The Glass-Steagle Act, put in place by FDR in1933 to prevent commercial banks from merging with investment banks and engaging in speculation, (which inlarge part caused the Great Depression), was slowly dismantled through the coordinated efforts of Americaslargest banks, the Federal Reserve, and the US Treasury Department. Thus, a massive wave of consolidation took place, as large banks ate smaller banks, corporations merged,where banks and corporations stopped being American or European and became truly global. Some of the key

individuals that took part in the dismantling of Glass-Steagle and the expansion of financialization were AlanGreenspan at the Federal Reserve and Robert Rubin and Lawrence Summers at the Treasury Department, nowkey officials in Obamas economic team. This era saw the rise of derivatives which are complex financial instruments that essentially act as short-terminsurance policies, betting and speculating that an asset price or commodity would go up or go down in value,allowing money to be made on whether stocks or prices go up or down. However, it wasnt called insurance because insurance has to be regulated. Thus, it was referred to as derivatives trade, and organizations calledHedge Funds entered the picture in managing the global trade in derivatives. The stock market would go up as speculation on future profits drove stocks higher and higher, inflating amassive bubble in what was termed a virtual economy. The Federal Reserve facilitated this, as it hadpreviously done in the lead-up to the Great Depression, by keeping interest rates artificially low, and allowingfor easy-flowing money into the financial sector. The Federal Reserve thus inflated the dot-com bubble of the

technology sector. When this bubble burst, the Federal Reserve, with Allen Greenspan at the helm, created the housing bubble. The Federal Reserve maintained low interest rates and actively encouraged and facilitated the flow of moneyinto the housing sector. Banks were given free reign and actually encouraged to make loans to high-riskindividuals who would never be able to pay back their debt. Again, the middle class existed only in the myth of the free market. Concurrently, throughout the 1990s and into the early 2000s, the role of speculation as a financial instrument of war became apparent. Within the neoliberal global economy, money could flow easily into and out of countries.Thus, when confidence weakens in the prospect of one nations economy, there can be a case of capital flight where foreign investors sell their assets in that nations currency and remove their capital from that country.This results in an inevitable collapse of the nations economy. This happened to Mexico in 1994, in the midst of joining NAFTA, where international investors speculated againstthe Mexican peso, betting that it would collapse; they cashed in their pesos for dollars, which devalued the pesoand collapsed the Mexican economy. This was followed by the East Asian financial crisis in 1997, wherethroughout the 1990s, Western capital had penetrated East Asian economies speculating in real estate and thestock markets. However, this resulted in over-investment, as the real economy, (production, manufacturing,etc.) could not keep up with speculative capital. Thus, Western capital feared a crisis, and began speculating


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against the national currencies of East Asian economies, which triggered devaluation and a financial panic ascapital fled from East Asia into Western banking sectors. The economies collapsed and then the IMF came in to

restructure them accordingly. The same strategy was undertaken with Russia in 1998, and Argentina in 2001. [See: Andrew Gavin Marshall, Forging a New World Order Under a One World Government. Global Research:August 13, 2009 ] Throughout the 2000s, the housing bubble was inflated beyond measure, and around the middle of the decade,when the indicators emerged of a crisis in the housing market a commercial real estate bubble was formed. Thisbubble has yet to burst. The 2007-2008 Financial Crisis In 2007, the Bank for International Settlements (BIS), the most prestigious financial institution in the world andthe central bank to the worlds central banks, issued a warning that the world is on the verge of another GreatDepression, citing mass issuance of new-fangled credit instruments, soaring levels of household debt, extremeappetite for risk shown by investors, and entrenched imbalances in the world currency system.[11] As the housing bubble began to collapse, the commodity bubble was inflated, where money went increasinglyinto speculation, the stock market, and the price of commodities soared, such as with the massive increases inthe price of oil between 2007 and 2008. In September of 2007, a medium-sized British Bank called NorthernRock, a major partaker in the loans of bad mortgages which turned out to be worthless, sought help from theBank of England, which led to a run on the bank and investor panic. In February of 2008, the British governmentbought and nationalized Northern Rock.

In March of 2008, Bear Stearns, an American bank that had been a heavy lender in the mortgage real estatemarket, went into crisis. On March 14, 2008, the Federal Reserve Bank of New York worked with J.P. MorganChase (whose CEO is a board member of the NY Fed) to provide Bear Stearns with an emergency loan.However, they quickly changed their mind, and the CEO of JP Morgan Chase, working with the President of theNew York Fed, Timothy Geithner, and the Treasury Secretary Henry Paulson (former CEO of Goldman Sachs),forced Bear Stearns to sell itself to JP Morgan Chase for $2 a share, which had previously traded at $172 a sharein January of 2007. The merger was paid for by the Federal Reserve of New York, and charged to the UStaxpayer.

In June of 2008, the BIS again warned of an impending Great Depression.[12] In September of 2008, the US government took over Fannie Mae and Freddie Mac, the two major homemortgage corporations. The same month, the global bank Lehman Brothers declared bankruptcy, giving the

signal that no one is safe and that the entire economy was on the verge of collapse. Lehman was a major dealerin the US Treasury Securities market and was heavily invested in home mortgages. Lehman filed for bankruptcyon September 15, 2008, marking the largest bankruptcy in US history. A wave of bank consolidation spreadacross the United States and internationally. The big banks became much bigger as Bank of America swallowedMerrill Lynch, JP Morgan ate Washington Mutual, and Wells Fargo took over Wachovia. In November of 2008, the US government bailed out the largest insurance company in the world, AIG. TheFederal Reserve Bank of New York, with Timothy Geithner at the helm:

[Bought out], for about $30 billion, insurance contracts AIG sold on toxic debt securities tobanks, including Goldman Sachs Group Inc., Merrill Lynch & Co., Societe Generale and DeutscheBank AG, among others. That decision, critics say, amounted to a back-door bailout for thebanks, which received 100 cents on the dollar for contracts that would have been worth far lesshad AIG been allowed to fail.

As Bloomberg reported, since the New York Fed is quasi-governmental, as in, it is given government authority,but not subject to government oversight, and is owned by the banks that make up its board (such as JP MorganChase), Its as though the New York Fed was a black-ops outfit for the nations central bank.[13] The Bailout In the fall of 2008, the Bush administration sought to implement a bailout package for the economy, designed tosave the US banking system. The leaders of the nation went into rabid fear mongering. The President warned:

More banks could fail, including some in your community. The stock market would drop evenmore, which would reduce the value of your retirement account. The value of your home couldplummet. Foreclosures would rise dramatically.

The head of the Federal Reserve Board, Ben Bernanke, as well as Treasury Secretary Paulson, in lateSeptember warned of recession, layoffs and lost homes if Congress doesnt quickly approve the Bushadministrations emergency $700 billion financial bailout plan.[14] Seven months prior, in February of 2008,prior to the collapse of Bear Stearns, both Bernanke and Paulson said the nation will avoid falling intorecession.[15] In September of 2008, Paulson was saying that people should be scared.[16]


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The bailout package was made into a massive financial scam, which would plunge the United States intounprecedented levels of debt, while pumping incredible amounts of money into major global banks. The public was told, as was the Congress, that the bailout was worth $700 billion dollars. However, this wasextremely misleading, and a closer reading of the fine print would reveal much more, in that $700 billion is theamount that could be spent at any one time. As Chris Martenson wrote:

This means that $700 billion is NOT the cost of this dangerous legislation, it is only the amountthat can be outstanding at any one time. After, say, $100 billion of bad mortgages are disposedof, another $100 billion can be bought. In short, these four little words assure that there is NOLIMIT to the potential size of this bailout. This means that $700 billion is a rolling amount, not aceiling. So what happens when you have vague language and an unlimited budget? Fraud andself-dealing. Mark my words, this is the largest looting operation ever in the history of the US,and it's all spelled out right in this delightfully brief document that is about to be rammedthrough a scared Congress and made into law.[17]

Further, the proposed bill would raise the nation's debt ceiling to $11.315 trillion from $10.615 trillion, and thatthe actions taken as a result of the passage of the bill would not be subject to investigation by the nations courtsystem, as it would bar courts from reviewing actions taken under its authority:

The Bush administration seeks dictatorial power unreviewable by the third branch of government, the courts, to try to resolve the crisis, said Frank Razzano, a former assistant

chief trial attorney at the Securities and Exchange Commission now at Pepper Hamilton LLP inWashington. We are taking a huge leap of faith.[18] Larisa Alexandrovna, writing with the Huffington Post , warned that the passage of the bailout bill will be the finalnails in the coffin of the fascist coup over America, in the form of financial fascists:

This manufactured crisis is now to be remedied, if the fiscal fascists get their way, with the totaltransfer of Congressional powers (the few that still remain) to the Executive Branch and thetotal transfer of public funds into corporate (via government as intermediary) hands.

[. . . ] The Treasury Secretary can buy broadly defined assets, on any terms he wants, he canhire anyone he wants to do it and can appoint private sector companies as financial deputies of the US government. And he can write whatever regulation he thinks [is] needed.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable andcommitted to agency discretion, and may not be reviewed by any court of law or anyadministrative agency.[19]

At the same time, the US Federal Reserve was bailing out foreign banks of hundreds of billions of dollars, thatare desperate for dollars and cant access Americas frozen credit markets a move co-ordinated with centralbanks in Japan, the Eurozone, Switzerland, Canada and here in the UK.[20] The moves would have beencoordinated through the Bank for International Settlements (BIS) in Basle, Switzerland. As Politico reported,

foreign-based banks with big U.S. operations could qualify for the Treasury Departments mortgage bailout. ATreasury Fact Sheet released by the US Department of Treasury stated that:

Participating financial institutions must have significant operations in the U.S., unless theSecretary makes a determination, in consultation with the Chairman of the Federal Reserve,that broader eligibility is necessary to effectively stabilize financial markets.[21]

So, the bailout package would not only allow for the rescue of American banks, but any banks internationally,whether public or private, if the Treasury Secretary deemed it necessary, and that none of the Secretarysdecisions could be reviewed or subjected to oversight of any kind. Further, it would mean that the TreasurySecretary would have a blank check, but simply wouldnt be able to hand out more than $700 billion at any onetime. In short, the bailout is in fact, a coup dtat by the banks over the government. Many Congressmen were told that if they failed to pass the bailout package, they were threatened with martiallaw.[22] Sure enough, Congress passed the bill, and the financial coup had been a profound success. No wonder then, in early 2009, one Congressman reported that the banks are still the most powerful lobby onCapitol Hill. And they frankly own the place.[23] Another Congressman said that The banks run the place, andexplained, I will tell you what the problem is - they give three times more money than the next biggest group.It's huge the amount of money they put into politics.[24] The Collapse of I celand On October 9th, 2008, the government of Iceland took control of the nations largest bank, nationalizing it, andhalted trading on the Icelandic stock market. Within a single week, the vast majority of Iceland's once-proudbanking sector has been nationalized. In early October, it was reported that:


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Iceland, which has transformed itself from one of Europe's poorest countries to one of itswealthiest in the space of a generation, could face bankruptcy. In a televised address to thenation, Prime Minister Geir Haarde conceded: "There is a very real danger, fellow citizens, thatthe Icelandic economy in the worst case could be sucked into the whirlpool, and the result couldbe national bankruptcy."

An article in BusinessWeek explained:

How did things get so bad so fast? Blame the Icelandic banking system's heavy reliance onexternal financing. With the privatization of the banking sector, completed in 2000, Iceland'sbanks used substantial wholesale funding to finance their entry into the local mortgage marketand acquire foreign financial firms, mainly in Britain and Scandinavia. The banks, in large part,were simply following the international ambitions of a new generation of Icelandic entrepreneurswho forged global empires in industries from retailing to food production to pharmaceuticals. Bythe end of 2006, the total assets of the three main banks were $150 billion, eight times thecountry's GDP. In just five years, the banks went from being almost entirely domestic lenders to becomingmajor international financial intermediaries. In 2000, says Richard Portes, a professor of economics at London Business School, two-thirds of their financing came from domestic sourcesand one-third from abroad. More recentlyuntil the crisis hitthat ratio was reversed. But aswholesale funding markets seized up, Iceland's banks started to collapse under a mountain of foreign debt.[25]

This was the grueling situation that faced the government at the time of the global economic crisis. The causes,however, were not Icelandic; they were international. Iceland owed more than $60 billion overseas, about sixtimes the value of its annual economic output. As a professor at London School of Economics said, No Westerncountry in peacetime has crashed so quickly and so badly.[26] What went wrong? Iceland followed the path of neoliberalism, deregulated banking and financial sectors and aided in the spreadand ease of flow for international capital. When times got tough, Iceland went into crisis, as the Observerreported in early October 2008:

Iceland is on the brink of collapse. Inflation and interest rates are raging upwards. The krona,Iceland's currency, is in freefall and is rated just above those of Zimbabwe and Turkmenistan.

[. . . ] The discredited government and officials from the central bank have been huddled behindclosed doors for three days with still no sign of a plan. International banks won't send any moremoney and supplies of foreign currency are running out.[27]

In 2007, the UN had awarded Iceland the best country to live in:

The nation's celebrated rags-to-riches story began in the Nineties when free market reforms,fish quota cash and a stock market based on stable pension funds allowed Icelandicentrepreneurs to go out and sweep up international credit. Britain and Denmark were favouriteshopping haunts, and in 2004 alone Icelanders spent 894m on shares in British companies. In

just five years, the average Icelandic family saw its wealth increase by 45 per cent.[28] As the third of Icelands large banks was in trouble, following the government takeover of the previous two, the

UK responded by freezing Icelandic assets in the UK. Kaupthing, the last of the three banks standing in earlyOctober, had many assets in the UK. On October 7th, Icelands Central Bank governor told the media, We will not pay for irresponsible debtorsandnot for banks who have behaved irresponsibly. The following day, UK Chancellor of the Exchequer, AlistairDarling, claimed that, The Icelandic government, believe it or not, have told me yesterday they have nointention of honoring their obligations here, although, Arni Mathiesen, the Icelandic minister of finance, said,

nothing in this telephone conversation can support the conclusion that Iceland would not honor itsobligation.[29] On October 10, 2008, UK Prime Minister Gordon Brown said, We are freezing the assets of Icelandic companiesin the United Kingdom where we can. We will take further action against the Icelandic authorities wherever thatis necessary to recover money. Thus:

Many Icelandic companies operating in the U.K., in totally unrelated industries, experiencedtheir assets being frozen by the U.K. government--as well as other acts of seeming vengeanceby U.K. businesses and media. The immediate effect of the collapse of Kaupthing is that Iceland's financial system is ruined andthe foreign exchange market shut down. Retailers are scrambling to secure currency for food


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imports and medicine. The IMF is being called in for assistance.[30] The UK had more than 840m invested in Icelandic banks, and they were moving in to save theirinvestments,[31] which just so happened to help spur on the collapse of the Icelandic economy. On October 24, 2008, an agreement between Iceland and the IMF was signed. In late November, the IMFapproved a loan to Iceland of $2.1 billion, with an additional $3 billion in loans from Denmark, Finland, Norway,Sweden, Russia, and Poland.[32] Why the agreement to the loan took so long, was because the UK pressuredthe IMF to delay the loan until a dispute over the compensation Iceland owes savers in Icesave, one of itscollapsed banks, is resolved.[33] In January of 2009, the entire Icelandic government was formally dissolved as the government collapsed whenthe Prime Minister and his entire cabinet resigned. This put the opposition part in charge of an interimgovernment.[34] In July of 2009, the new government formally applied for European Union membership,however, Icelanders have traditionally been skeptical of the benefits of full EU membership, fearing that theywould lose some of their independence as a small state within a larger political entity.[35] In August of 2009, Icelands parliament passed a bill to repay Britain and the Netherlands more than $5 billionlost in Icelandic deposit accounts:

Icelanders, already reeling from a crisis that has left many destitute, have objected to payingfor mistakes made by private banks under the watch of other governments. Their anger in particular is directed at Britain, which used an anti-terrorism law to seize

Icelandic assets during the crisis last year, a move which residents said added insult to injury. The government argued it had little choice but to make good on the debts if it wanted to ensureaid continued to flow. Rejection could have led to Britain or the Netherlands seeking to block aidfrom the International Monetary Fund (IMF).[36]

Iceland is now in the service of the IMF and its international creditors. The small independent nation that for solong had prided itself on a strong economy and strong sense of independence had been brought to its knees. In mid-January of 2010, the IMF and Sweden together delayed their loans to Iceland, due to Icelands failure toreach a 2.3bn compensation deal with Britain and the Netherlands over its collapsed Icesave accounts. Sweden, the UK and the IMF were blackmailing Iceland to save UK assets in return for loans.[37] In February of 2010, it was reported that the EU would begin negotiations with Iceland to secure Icelandic

membership in the EU by 2012. However, Icelands aspirations are now tied partially to a dispute with theNetherlands and Britain over $5 billion in debts lost in the country's banking collapse in late 2008.[38] Iceland stood as a sign of what was to come. The sovereign debt crisis that brought Iceland to its knees had newtargets on the horizon. Dubai Hit By Financial Storm In February of 2009, the Guardian reported that, A six-year boom that turned sand dunes into a glitteringmetropolis, creating the world's tallest building, its biggest shopping mall and, some say, a shrine to unbridledcapitalism, is grinding to a halt, as Dubai, one of six states that form the United Arab Emirates (UAE), went intocrisis. Further, the real estate bubble that propelled the frenetic expansion of Dubai on the back of borrowedcash and speculative investment, has burst.[39]

Months later, in November of 2009, Dubai was plunged into a debt crisis, prompting fears of sparking adouble-dip recession and the next wave of the financial crisis. As the Guardian reported:

Governments have cut interest rates, created new electronic money and allowed budget deficitsto reach record levels in an attempt to boost growth after the near-collapse of the globalfinancial system. [. . . ] Despite having oil, it's still the case that many of these countries hadexplosive credit growth. It's very clear that in 2010, we've got plenty more problems instore.[40]

The neighboring oil-rich state of Abu Dhabi, however, came to the rescue of Dubai with a $10 billion bailoutpackage, leading the Foreign Minister of the UAE to declare Dubais financial crisis as over.[41] In mid-February of 2010, however, renewed fears of a debt crisis in Dubai resurfaced; Morgan Stanley reportedthat, the cost to insure against a Dubai default [in mid-February] shot up to the level it was at during the peakof the city-state's debt crisis in November.[42] These fears resurfaced as:

Investors switched their attention to the Gulf [on February 15] as markets reacted to fears thata restructuring plan from the state-owned conglomerate Dubai World would pay creditors only60 per cent of the money they are owed.[43]


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Again, the aims that governments seek in the unfolding debt crisis is not to save their people from a collapsingeconomy and inflated currency, but to save the interests of their major banks and corporations within eachcollapsing economy. A Sovereign Debt Crisis Hits Greece In October of 2009, a new Socialist government came to power in Greece on the promise of injecting 3 billioneuros to reinvigorate the Greek economy.[44] Greece had suffered particularly hard during the economic crisis;it experienced riots and protests. In December of 2009, Greece said it would not default on its debt, but thegovernment added, Salaried workers will not pay for this situation: we will not proceed with wage freezes orcuts. We did not come to power to tear down the social state. As Ambrose Evans-Pritchard wrote for theTelegraph in December of 2009:

Greece is being told to adopt an IMF-style austerity package, without the devaluation so centralto IMF plans. The prescription is ruinous and patently self-defeating. Public debt is already 113pcof GDP. The [European] Commission says it will reach 125pc by late 2010. It may top 140pc by2012. If Greece were to impose the draconian pay cuts under way in Ireland (5pc for lower stateworkers, rising to 20pc for bosses), it would deepen depression and cause tax revenues tocollapse further. It is already too late for such crude policies. Greece is past the tipping point of a compound debt spiral.

Evans-Pritchard wrote that the crisis in Greece had much to do with the European Monetary Union (EMU), which

created the Euro, and made all member states subject to the decisions of the European Central Bank, as Interest rates were too low for Greece, Portugal, Spain, and Ireland, causing them all to be engulfed in adestructive property and wage boom. Further:

EU states may club together to keep Greece afloat with loans for a while. That solves nothing. Itincreases Greece's debt, drawing out the agony. What Greece needs unless it leaves EMU isa permanent subsidy from the North. Spain and Portugal will need help too.[45]

Greeces debt had soared, by early December 2009, to a spiraling 300-billion euros, as its financial woes havealso weighed on the euro currency, whose long-term value depends on member countries keeping their financesin order. Further, Ireland, Spain and Portugal were all facing problems with their debt. As it turned out, theprevious Greek government had been cooking the books, and when the new government came to power, itinherited twice the federal deficit it had anticipated.[46]

In February of 2010, the New York Times revealed that: [W]ith Wall Streets help, [Greece] engaged in a decade-long effort to skirt European debtlimits. One deal created by Goldman Sachs helped obscure billions in debt from the budgetoverseers in Brussels. Even as the crisis was nearing the flashpoint, banks were searching for ways to help Greeceforestall the day of reckoning. In early November three months before Athens became theepicenter of global financial anxiety a team from Goldman Sachs arrived in the ancient citywith a very modern proposition for a government struggling to pay its bills, according to twopeople who were briefed on the meeting. The bankers, led by Goldmans president, Gary D. Cohn, held out a financing instrument thatwould have pushed debt from Greeces health care system far into the future, much as when

strapped homeowners take out second mortgages to pay off their credit cards.[47] Even back in 2001, when Greece joined the Euro-bloc, Goldman Sachs helped the country quietly borrowbillions in a deal hidden from public view because it was treated as a currency trade rather than a loan, [and]helped Athens to meet Europes deficit rules while continuing to spend beyond its means. Further, Greeceowes the world $300 billion, and major banks are on the hook for much of that debt. A default wouldreverberate around the globe. Both Goldman Sachs and JP Morgan Chase had undertaken similar efforts inItaly and other countries in Europe as well.[48] In early February, EU nations led by France and Germany met to discuss a rescue package for Greece, likelywith the help of the European Central Bank and possibly the IMF. The issue had plunged the Eurozone into acrisis, as confidence in the Euro fell across the board, and Germans have become so disillusioned with the euro,many will not accept notes produced outside their homeland.[49] Germany was expected to bail out the Greek economy, much to the dismay of the German people. As oneGerman politician stated, We cannot expect the citizens, whose taxes are already too high, to go along withsupporting the erroneous financial and budget policy of other states of the eurozone. One economist warnedthat the collapse of Greece could lead to a collapse of the Euro:

There are enough people speculating on the markets about the possible bankruptcy of Greece,


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and once Greece goes, they would then turn their attentions to Spain and Italy, and Germanyand France would be forced to step in once again.[50]

However, the Lisbon Treaty had been passed over 2009, which put into effect a European Constitution, givingBrussels enormous powers over its member states. As the Telegraph reported on February 16, 2010, the EUstripped Greece of its right to vote at a crucial meeting to take place in March:

The council of EU finance ministers said Athens must comply with austerity demands by March16 or lose control over its own tax and spend policies altogether. It if fails to do so, the EU willitself impose cuts under the draconian Article 126.9 of the Lisbon Treaty in what would amountto economic suzerainty [i.e., foreign economic control]. While the symbolic move to suspend Greece of its voting rights at one meeting makes nopractical difference, it marks a constitutional watershed and represents a crushing loss of sovereignty. "We certainly won't let them off the hook," said Austria's finance minister, Josef Proll, echoingviews shared by colleagues in Northern Europe. Some German officials have called for Greece tobe denied a vote in all EU matter until it emerges from "receivership". The EU has still refused to reveal details of how it might help Greece raise 30bn (26bn) fromglobal debt markets by the end of June.[51]

It would appear that the EU is in a troubling position. If they allow the IMF to rescue Greece, it would be a blow

to the faith in the Euro currency, whereas if they bailout Greece, it will encourage internal pressures withinEuropean countries to abandon the Euro. In early February, Ambrose Evans-Pritchard wrote in the Telegraph that, The Greek debt crisis has spread toSpain and Portugal in a dangerous escalation as global markets test whether Europe is willing to shore upmonetary union with muscle rather than mere words:

Julian Callow from Barclays Capital said the EU may to need to invoke emergency treaty powersunder Article 122 to halt the contagion, issuing an EU guarantee for Greek debt. If notcontained, this could result in a Lehman-style tsunami spreading across much of the EU. [. . . ] EU leaders will come to the rescue in the end, but Germany has yet to blink in this gameof brinkmanship. The core issue is that EMUs credit bubble has left southern Europe with hugeforeign liabilities: Spain at 91pc of GDP (950bn); Portugal 108pc (177bn). This compares with

87pc for Greece (208bn). By this gauge, Iberian imbalances are worse than those of Greece,and the sums are far greater. The danger is that foreign creditors will cut off funding, setting off an internal EMU version of the Asian financial crisis in 1998.[52]

Fear began to spread in regards to a growing sovereign debt crisis, stretching across Greece, Spain andPortugal, and likely much wider and larger than that. A Global Debt Crisis In 2007, the Bank for International Settlements (BIS), the world's most prestigious financial body, warned of acoming great depression, and stated that while in a crisis, central banks may cut interest rates (which theysubsequently did). However, as the BIS pointed out, while cutting interest rates may help, in the long run it hasthe effect of sowing the seeds for more serious problems further ahead.[53]

In the summer of 2008, prior to the apex of the 2008 financial crisis in September and October, the BIS againwarned of the inherent dangers of a new Great Depression. As Ambrose Evans-Pritchard wrote, the ultimatebank of central bankers warned that central banks, such as the Federal Reserve, would not find it so easy to

clean up the messes they had made in asset-price bubbles. The BIS report stated that, It is not impossible that the unwinding of the credit bubble could, after a temporaryperiod of higher inflation, culminate in a deflation that might be hard to manage, all the more so given the highdebt levels. As Evans-Pritchard explained, this amounts to a warning that monetary overkill by the Fed, theBank of England, and above all the European Central Bank could prove dangerous at this juncture. The BISreport warned that, Global banks - with loans of $37 trillion in 2007, or 70pc of world GDP - are still in the eyeof the storm. Ultimately, the actions of central banks were designed to put off the day of reckoning, not toprevent it.[54] Seeing how the BIS is not simply a casual observer, but is in fact the most important financial institution in theworld, as it is where the worlds central bankers meet and, in secret, decide monetary policy for the world. Ascentral banks have acted as the architects of the financial crisis, the BIS warning of a Great Depression is notsimply a case of Cassandra prophesying the Trojan Horse, but is a case where she prophesied the horse, thenopened the gates of Troy and pulled the horse in. It was within this context that the governments of the world took on massive amounts of debt and bailed out the


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financial sectors from their accumulated risk by buying their bad debts. In late June of 2009, several months following Western governments implementing bailouts and stimuluspackages, the world was in the euphoria of recovery. At this time, however, the Bank for InternationalSettlements released another report warning against such complacency in believing in the recovery. The BISwarned of only limited progress in fixing the financial system. The article is worth quoting at length:

Instead of implementing policies designed to clean up banks' balance sheets, some rescue planshave pushed banks to maintain their lending practices of the past, or even increase domesticcredit where it's not warranted. [. . . ] The lack of progress threatens to prolong the crisis and delay the recovery because adysfunctional financial system reduces the ability of monetary and fiscal actions to stimulate theeconomy. That's because without a solid banking system underpinning financial markets, stimulusmeasures won't be able to gain traction, and may only lead to a temporary pickup in growth . A fleeting recovery could well make matters worse , the BIS warns, since further governmentsupport for banks is absolutely necessary, but will become unpopular if the public sees arecovery in hand . And authorities may get distracted with sustaining credit, asset prices anddemand rather than focusing on fixing bank balance sheets. [. . . ] It warned that despite the unprecedented measures in the form of fiscal stimulus, interest

rate cuts, bank bailouts and quantitative easing, there is an open question whether the policieswill be able to stabilize the global economy. And as governments bulk up their deficits to spend their way out of the crisis, they need to becareful that their lack of restraint doesn't come back to bite them, the central bankers said. If governments don't communicate a credible exit strategy, they will find it harder to place debt,and could face rising funding costs leading to spending cuts or significantly higher taxes .[55]

The BIS had thus endorsed the bailout and stimulus packages, which is no surprise, considering that the BIS isowned by the central banks of the world, which in turn are owned by the major global banks that were bailedout by the governments. However, the BIS warned that these rescue efforts, while necessary for the banks,will likely have deleterious effects for national governments. The BIS warned that, theres a risk central banks will raise interest rates and withdraw emergency liquidity too

late, triggering inflation: Central banks around the globe have lowered borrowing costs to record lows and injectedbillions of dollars [or, more accurately, trillions] into the financial system to counter the worstrecession since World War II. While some policy makers have stressed the need to withdraw theemergency measures as soon as the economy improves, the Federal Reserve, Bank of England,and European Central Bank are still in the process of implementing asset-purchase programsdesigned to unblock credit markets and revive growth.

The big and justifiable worry is that, before it can be reversed, the dramatic easing in monetarypolicy will translate into growth in the broader monetary and credit aggregates, the BIS said.That will lead to inflation that feeds inflation expectations or it may fuel yet another asset-pricebubble, sowing the seeds of the next financial boom-bust cycle .[56]

Of enormous significance was the warning from the BIS that, fiscal stimulus packages may provide no morethan a temporary boost to growth, and be followed by an extended period of economic stagnation . As theAustralian reported in late June:

The only international body to correctly predict the financial crisis - the Bank for InternationalSettlements (BIS) - has warned the biggest risk is that governments might be forced by worldbond investors to abandon their stimulus packages, and instead slash spending while liftingtaxes and interest rates.

Further, major western countries such as Australia faced the possibility of a run on the currency, which wouldforce interest rates to rise, and Particularly in smaller and more open economies, pressure on the currencycould force central banks to follow a tighter policy than would be warranted by domestic economic conditions. Not surprisingly, the BIS stated that, government guarantees and asset insurance have exposed taxpayers topotentially large losses , through the bailouts and stimulus packages, and stimulus programs will drive up realinterest rates and inflation expectations, as inflation would intensify as the downturn abated.[57] In May of 2009, Simon Johnson, former chief economist of the International Monetary Fund (IMF), warned thatBritain faces a major struggle in the next phase of the economic crisis:

[T]he mountain of debt that had poisoned the financial system had not disappeared overnight.


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Instead, it has been shifted from the private sector onto the public sector balance sheet. Britainhas taken on hundreds of billions of pounds of bank debt and stands behind potentially trillions of dollars of contingent liabilities. If the first stage of the crisis was the financial implosion and the second the economic crunch,the third stage the one heralded by Johnson is where governments start to topple under theweight of this debt. If 2008 was a year of private sector bankruptcies, 2009 and 2010, it goes,will be the years of government insolvency.

However, as dire as things look for Britain, The UK is likely to be joined by other countries as the full scale of the downturn becomes apparent and more financial skeletons are pulled from the sub-prime closet.[58] In September of 2009, the former Chief Economist of the Bank for International Settlements (BIS), WilliamWhite, who had accurately predicted the previous crisis, warned that, The world has not tackled the problemsat the heart of the economic downturn and is likely to slip back into recession. He also warned thatgovernment actions to help the economy in the short run may be sowing the seeds for future crises. An articlein the Financial Times elaborated:

Are we going into a W[-shaped recession]? Almost certainly. Are we going into an L? I wouldnot be in the slightest bit surprised, [White] said, referring to the risks of a so-called double-diprecession or a protracted stagnation like Japan suffered in the 1990s.

The only thing that would really surprise me is a rapid and sustainable recovery from theposition were in.

The comments from Mr White, who ran the economic department at the central banks bankfrom 1995 to 2008, carry weight because he was one of the few senior figures to predict thefinancial crisis in the years before it struck. Mr White repeatedly warned of dangerous imbalances in the global financial system as far backas 2003 and breaking a great taboo in central banking circles at the time he dared tochallenge Alan Greenspan, then chairman of the Federal Reserve, over his policy of persistentcheap money [i.e., low interest rates]. [. . . ] Worldwide, central banks have pumped [trillions] of dollars of new money into thefinancial system over the past two years in an effort to prevent a depression. Meanwhile,governments have gone to similar extremes, taking on vast sums of debt to prop up industriesfrom banking to car making.

These measures may already be inflating a bubble in asset prices, from equities to commodities,he said, and there was a small risk that inflation would get out of control over the medium termif central banks miss-time their exit strategies. Meanwhile, the underlying problems in the global economy, such as unsustainable tradeimbalances between the US, Europe and Asia, had not been resolved.[59]

In late September of 2009, the General Manager of the BIS warned governments against complacency, sayingthat, the market rebound should not be misinterpreted, and that, The profile of the recovery is not clear.[60] In September, the Financial Times further reported that William White, former Chief Economist at the BIS, also

argued that after two years of government support for the financial system, we now have a set of banks thatare even bigger and more dangerous than ever before, which also, has been argued by Simon Johnson,

former chief economist at the International Monetary Fund, who says that the finance industry has in effectcaptured the US government, and pointedly stated: recovery will fail unless we break the financial oligarchythat is blocking essential reform.[61] In mid-September, the BIS released a warning about the global financial system, as The global market forderivatives rebounded to $426 trillion in the second quarter [of 2009] as risk appetite returned, but the systemremains unstable and prone to crises. The derivatives rose by 16% mostly due to a surge in futures andoptions contracts on three-month interest rates. In other words, speculation is back in full force as bailoutmoney to banks in turn fed speculative practices that have not been subjected to reform or regulation. Thus, theproblems that created the previous crisis are still present and growing:

Stephen Cecchetti, the [BIS] chief economist, said over-the-counter markets for derivatives arestill opaque and pose "major systemic risks" for the financial system. The danger is thatregulators will again fail to see that big institutions have taken far more exposure than they canhandle in shock conditions, repeating the errors that allowed the giant US insurer AIG to writenearly "half a trillion dollars" of unhedged insurance through credit default swaps.[62]

In late November of 2009, Morgan Stanley warned that, Britain risks becoming the first country in the G10 blocof major economies to risk capital flight and a full-blown debt crisis over coming months. The Bank of Englandmay have to raise interest rates before it is ready -- risking a double-dip recession, and an incipient


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compound-debt spiral. Further:

Morgan Stanley said [the] sterling may fall a further 10pc in trade-weighted terms. This wouldcomplete the steepest slide in the pound since the industrial revolution, exceeding the 30pc dropfrom peak to trough after Britain was driven off the Gold Standard in cataclysmic circumstancesin 1931.[63]

As Ambrose Evans-Pritchard wrote for the Telegraph , this is a reminder that countries merely bought timeduring the crisis by resorting to fiscal stimulus and shunting private losses onto public books, and, while heendorsed the stimulus packages claiming it was necessary, he admitted that the stimulus packages have notresolved the underlying debt problem. They have storied up a second set of difficulties by degrading sovereigndebt across much of the world.[64] Morgan Stanley said another surprise in 2010 could be a surge in the dollar.However, this would be due to capital flight out of Europe as its economies crumble under their debt burdensand capital seeks a safe haven in the US dollar. In December of 2009, the Wall Street Journal reported on the warnings of some of the nations top economists,who feared that following a financial crisis such as the one experienced in the previous two years, there'stypically a wave of sovereign default crises. As economist Kenneth Rogoff explained, If you want to knowwhat's next on the menu, that's a good bet, as Spiraling government debts around the world, fromWashington to Berlin to Tokyo, could set the scene for years of financial troubles. Apart from the obviousexample of Greece, other countries are at risk, as the author of the article wrote:

Also worrying are several other countries at the periphery of Europethe Baltics, EasternEuropean countries like Hungary, and maybe Ireland and Spain. This is where public finances

are worst. And the handcuffs of the European single currency, Prof. Rogoff said, mean individualcountries can't just print more money to get out of their debts. (For the record, the smartestinvestor I have ever known, a hedge fund manager in London, is also anticipating a sovereigndebt crisis.) [. . . ] The major sovereign debt crises, he said, are probably a couple of years away. The keyissue is that this time, the mounting financial troubles of the U.S., Germany and Japan meanthese countries, once the rich uncles of the world, will no longer have the money to step in andrescue the more feckless nieces and nephews.

Rogoff predicted that, We're going to be raising taxes sky high, and that, we're probably going to see a lot of inflation, eventually. We will have to. It's the easiest way to reduce the value of those liabilities in real terms. Rogoff stated, The way rich countries default is through inflation. Further, even U.S. municipal bonds won't besafe from trouble. California could be among those facing a default crisis. Rogoff elaborated, It wouldn't

surprise me to see the Federal Reserve buying California debt at some point, or some form of bailout.[65] The bailouts, particularly that of the United States, handed a blank check to the worlds largest banks. Asanother favour, the US government put those same banks in charge of reform and regulation of the bankingindustry. Naturally, no reform or regulation took place. Thus, the money given to banks by the government canbe used in financial speculation. As the sovereign debt crisis unfolds and spreads around the globe, the majorinternational banks will be able to create enormous wealth in speculation, rapidly pulling their money out of onenation in debt crisis, precipitating a collapse, and moving to another, until all the dominoes have fallen, and thebanks stand larger, wealthier, and more powerful than any nation or institution on earth (assuming they alreadyarent). This is why the bankers were so eager to undertake a financial coup of the United States, to ensure thatno actual reform took place, that they could loot the nation of all it has, and profit off of its eventual collapse andthe collapse of the global economy. The banks have been saved! Now everyone else must pay. Edmund Conway, the Economics Editor of the Telegraph , reported in early January of 2010, that throughout the

year: [S]overeign credit will buckle under the strain of [government] deficits; the economic recoverywill falter as the Government withdraws its fiscal stimulus measures and more companies willcontinue to fail. In other words, 2010 is unlikely to be the year of a V-shaped recovery.[66]

In other words, the recovery is an illusion. In mid-January of 2010, the World Economic Forum released areport in which it warned that, There is now more than a one-in-five chance of another asset price bubbleimplosion costing the world more than 1 trillion, and similar odds of a full-scale sovereign fiscal crisis. Thereport warned of a simultaneous second financial crisis coupled with a major fiscal crisis as countries default ontheir debts. The report also warned of the possibility of China's economy overheating and, instead of helpingsupport global economic growth, preventing a fully-fledged recovery from developing. Further:

The report, which in previous years had been among the first to cite the prospect of a financialcrisis, the oil crisis that preceded it and the ongoing food crisis, included a list of growing risksthreatening leading economies. Among the most likely, and potentially most costly, is asovereign debt crisis, as some countries struggle to afford the unprecedented costs of the crisisclean-up, the report said, specifically naming the UK and the US. [. . .] The report also highlights the risk of a further asset price collapse, which could derail the


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nascent economic recovery across the world, with particular concern surrounding China, whichsome fear may follow the footsteps Japan trod in the 1990s.[67]

Nouriel Roubini, one of Americas top economists who predicted the financial crisis, wrote an article in Forbes inJanuary of 2010 explaining that, the severe recession, combined with a financial crisis during 2008-09,worsened the fiscal positions of developed countries due to stimulus spending, lower tax revenues and supportto the financial sector. He warned that the debt burden of major economies, including the US, Japan andBritain, would likely increase. With this, investors will become wary of the sustainability of fiscal markets andwill begin to withdraw from debt markets, long considered safe havens. Further:

Most central banks will withdraw liquidity starting in 2010, but government financing needs willremain high thereafter. Monetization and increased debt issuances by governments in thedeveloped world will raise inflation expectations.

As interest rates rise, which they will have to in a tightening of monetary policy, (which up until now have beenkept artificially low so as to encourage the spread of liquidity around the world), interest payments on the debtwill increase dramatically. Roubini warned:

The U.S. and Japan might be among the last to face investor aversionthe dollar is the globalreserve currency and the U.S. has the deepest and most liquid debt markets, while Japan is anet creditor and largely finances its debt domestically. But investors will turn increasinglycautious even about these countries if the necessary fiscal reforms are delayed.[68]

Governments will thus need to drastically increase taxes and cut spending. Essentially, this will amount to a

global Structural Adjustment Program (SAP) in the developed, industrialized nations of the West. Where SAPs imposed upon Third World debtor nations would provide a loan in return for the dismantling of thepublic state, higher taxes, growing unemployment, total privatization of state industries and deregulation of trade and investment, the loans provided by the IMF and World Bank would ultimately benefit Westernmultinational corporations and banks. This is what the Western world now faces: we bailed out the banks, andnow we must pay for it, through massive unemployment, increased taxes, and the dismantling of the publicsphere. In February of 2010, Niall Ferguson, a prominent British economic historian, wrote an article for the FinancialTimes entitled, A Greek Crisis Coming to America. He starts by explaining that, It began in Athens. It isspreading to Lisbon and Madrid. But it would be a grave mistake to assume that the sovereign debt crisis that isunfolding will remain confined to the weaker eurozone economies. He explained that this is not a crisis confinedto one region, It is a fiscal crisis of the western world, and Its ramifications are far more profound than most

investors currently appreciate. Ferguson writes that, the problem is essentially the same from Iceland toIreland to Britain to the US. It just comes in widely differing sizes, and the US is no small risk:

For the worlds biggest economy, the US, the day of reckoning still seems reassuringly remote.The worse things get in the eurozone, the more the US dollar rallies as nervous investors parktheir cash in the safe haven of American government debt. This effect may persist for somemonths, just as the dollar and Treasuries rallied in the depths of the banking panic in late 2008. Yet even a casual look at the fiscal position of the federal government (not to mention thestates) makes a nonsense of the phrase safe haven. US government debt is a safe haven theway Pearl Harbor was a safe haven in 1941.

Ferguson points out that, The long-run projections of the Congressional Budget Office suggest that the US willnever again run a balanced budget. Thats right, never. Ferguson explains that debt will hurt major economies:

By raising fears of default and/or currency depreciation ahead of actual inflation, they push upreal interest rates. Higher real rates, in turn, act as drag on growth, especially when the privatesector is also heavily indebted as is the case in most western economies, not least the US. Although the US household savings rate has risen since the Great Recession began, it has notrisen enough to absorb a trillion dollars of net Treasury issuance a year. Only two things havethus far stood between the US and higher bond yields: purchases of Treasuries (and mortgage-backed securities, which many sellers essentially swapped for Treasuries) by the FederalReserve and reserve accumulation by the Chinese monetary authorities.[69]

In late February of 2010, the warning signs were flashing red that interest rates were going to have to rise,taxes increase, and the burden of debt would need to be addressed. China Begins to Dump U S Treasuries US Treasuries are US government debt that is issued by the US Treasury Department, which are bought byforeign governments as an investment. It is a show of faith in the US economy to buy their debt (i.e.,Treasuries). In buying a US Treasury, you are lending money to the US government for a certain period of time.


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However, as the United States has taken on excessive debt loads to save the banks from crisis, the prospect of buying US Treasuries has become less appealing, and the threat that they are an unsafe investment isever-growing. In February of 2009, Hilary Clinton urged China to continue buying US Treasuries in order tofinance Obamas stimulus package. As an ar ticle in Bloomberg pointed out:

The U.S. is the single largest buyer of the exports that drive growth in China, the worlds third-largest economy. China in turn invests surplus earnings from shipments of goods such as toys,clothing and steel primarily in Treasury securities, making it the worlds largest holder of U.S.government debt at the end of last year with $696.2 billion.[70]

The following month, the Chinese central bank announced that they would continue buying US Treasuries.[71] However, in February of 2009, Warren Buffet, one of the worlds richest individuals, warned against buying USTreasuries:

Buffett said that with the U.S. Federal Reserve and Treasury Department going "all in" to jump-start an economy shrinking at the fastest pace since 1982, "once-unthinkable dosages" of stimulus will likely spur an "onslaught" of inflation, an enemy of fixed-income investors. "The investment world has gone from underpricing risk to overpricing it," Buffett wrote. "Cash isearning close to nothing and will surely find its purchasing power eroded over time." "When the financial history of this decade is written, it will surely speak of the Internet bubble of the late 1990s and the housing bubble of the early 2000s," he went on. "But the U.S. Treasury

bond bubble of late 2008 may be regarded as almost equally extraordinary."[72] In September of 2009, an article on CNN reported of the dangers if China were to start dumping US Treasuries,which could cause longer-term interest rates to shoot up since bond prices and yields move in oppositedirections, as a weakening US currency could lead to inflation, which would in turn, reduce the value and worthof Chinas holdings in US Treasuries.[73] It has become a waiting game; an economic catch-22: China holds US debt (Treasuries) which allows the US tospend to save the economy (or more accurately, the banks), but all the spending has plunged the US into suchabysmal debt from which it will never be able to emerge. The result is that inflation will likely occur, with apossibility of hyperinflation, thus reducing the value of the US currency. Chinas economy is entirely dependentupon the US as a consumer economy, while the US is dependent upon China as a buyer and holder of US debt.Both countries are delaying the inevitable. If China doesnt want to hold worthless investments (US debt) it muststop buying US Treasuries, and then international faith in the US currency would begin to fall, forcing interest

rates to rise, which could even precipitate a speculative assault against the US dollar. At the same time, acollapsing US currency and economy would not help Chinas economy, which would tumble with it. So, it hasbecome a waiting game. In February of 2010, the Financial Times reported that China had begun in December of 2009, the process of dumping US Treasuries, and thus falling behind Japan as the largest holder of US debt, selling approximately$38.8 billion of US Treasuries, as Foreign demand for US Treasury bonds fell by a record amount:

The fall in demand comes as countries retreat from the "flight to safety" strategy they embarkedon at the peak of the global financial crisis and could mean the US will have to pay more in debtinterest. For China, the sale of US Treasuries marks a reversal that it signalled last year when it said itwould begin to reduce some of its holdings. Any changes in its behaviour are politically sensitive

because it is the biggest US trade partner and has helped to finance US deficits. Alan Ruskin, a strategist at RBS Securities, said that China's behaviour showed that it felt"saturated" with Treasury paper. The change of sentiment could hurt the dollar and the Treasurymarket as the US has to look to other countries for financing.[74]

So, China has given the US a vote of non-confidence. This

debt dynamite dominoes: the coming financial catastrophe

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